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REMARKS OF JENNIFER SHASKY CALVERY DIRECTOR FINANCIAL CRIMES ENFORCEMENT NETWORK THE VIRTUAL ECONOMY: POTENTIAL, PERPLEXITIES AND

PROMISES UNITED STATES INSTITUTE OF PEACE WASHINGTON, DC JUNE 13, 2013 Good afternoon. It is a pleasure to be joining you at this event to discuss the potential, perplexities, and promises of the virtual economy. I would like to thank our co-hosts, Thomson Reuters, as well as the International Centre for Missing & Exploited Children, for inviting me to join you today. I would also like to thank the U.S. Institute of Peace for providing us with such a beautiful venue for our discussions. First, a few headlines from the past several weeks, which not only sum up the very theme of today’s discussions, but also illustrate how different our perspectives can be: “Is the Government Trying to Kill Digital Currency?” “Feds shut down payment network Liberty Reserve. Is Bitcoin next?” “FinCEN’s New Regulations Are Choking Bitcoin Entrepreneurs.” Or, on the other hand: “A little regulation may boost Bitcoin’s Main Street cred.” “New Money Laundering Guidelines Are a Positive Sign for Bitcoin.” “Feds don’t plan to take down Bitcoin or other currencies.” But, my personal favorite has to be, “FinCEN boss lays out Bitcoin rules.” If only it was that easy. One thing is clear – depending on what you read, FinCEN’s virtual currency guidance has been the worst thing, or the best thing, to ever happen to virtual currency, and Bitcoin in particular.
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along with its law enforcement partners. And our recent guidance is an important step to get us there. equally important is the need to ensure integrity and transparency. 2 . A key aspect of FinCEN’s mission is to administer and issue regulations pursuant to the Bank Secrecy Act (BSA). and the financial inclusion that they might offer society. analysis. uses the data contained in these reports to detect and deter money laundering. I will not deny that there are some troublesome providers out there. Those who use virtual currencies exclusively for common personal transactions like buying goods or services online are not affected by this guidance. let me take a moment to give you a quick overview. The guidance explains how FinCEN’s “money transmitter” definition applies to certain exchangers and system administrators of virtual currencies depending on the facts and circumstances of that activity. This March. Now. FinCEN. and maintaining records and filing reports with FinCEN. And we want these advances to continue. back to those headlines I mentioned at the outset. and reporting responsibilities. Those offering virtual currencies must comply with these regulatory requirements. for those of you who might not be as familiar with the work of FinCEN. It is in FinCEN’s regulatory area that our interests first intersected. Our mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection. government agencies in the detection and prevention of money laundering. and expand access to financial services. and dissemination of financial intelligence and strategic use of financial authorities. Some in the press speculated that our guidance was an attempt to clamp down on virtual currency providers. and if they do so. like car dealerships -. terrorist financing. financial institutions -including banks. A whole host of emerging technologies in the financial sector have proven their capacity to empower customers. recordkeeping. money services businesses. With approximately 340 employees. and other financial crime. FinCEN’s guidance explains that administrators or exchangers of virtual currencies have registration requirements and a broad range of AML program. However. insurance companies.S. and some trades or business.to assist U. FinCEN issued interpretive guidance to bring clarity and regulatory certainty for businesses and individuals engaged in money transmitting services and offering virtual currencies. Because the fact is. securities and futures brokers. they have nothing to fear from Treasury. The BSA requires a broad range of U. we are relatively small considering our broad responsibilities. casinos. being a financial institution comes with certain responsibilities. But. FinCEN is a bureau of the Treasury Department. that is balanced by a recognition of the innovation these virtual currencies provide. encourage the development of innovative financial products.Taking a step back. Financial institutions do this by instituting effective anti-money laundering (AML) programs. and reports to the Office of Terrorism and Financial Intelligence.S.

narcotics trafficking. such as those who would exploit children. unless an exception applies. Some virtual currency exchangers have already registered with FinCEN as MSBs. What is important is for institutions to put controls in place to deal with those money laundering threats. those illicit actors included criminal organizations engaged in credit card fraud. Legitimate financial institutions. and transparency. including virtual currency providers. And banks will want to service administrators or exchangers that show great integrity.S. The 311 action taken by FinCEN was designed to protect the financial system from the risk posed by Liberty Reserve – an online. Every financial institution needs to be concerned about its reputation and to go out of its way to show it is operating with transparency and integrity within the bounds of the law. though they have not necessarily identified themselves as money transmitters. But those institutions that choose to act outside of their AML obligations and outside of the law are going to be held accountable. FinCEN has been out front in issuing our guidance to make it clear that we see virtual currency administrators and exchangers as a type of money services business. being a good corporate citizen and complying with regulatory responsibilities is good for a company’s bottom line. are money transmitters that must register with FinCEN as MSBs. money transfer system that was conceived and operated specifically to allow – and encourage – illicit use because of the anonymity it offers. and most relevant for today’s purposes. do not go into business with the aim of laundering money on behalf of criminals. innovation. and to meet their AML reporting obligations. 3 . identity theft. As such. Customers are going to be drawn to a virtual currency administrator or exchanger where they know their money is safe and where they know the company has a reputation for integrity. The guidance clarifies definitions and expectations to ensure that businesses engaged in similar activities are aware of their regulatory responsibilities and that all who need to. According to the allegations contained in a related criminal action brought by the U. and the same obligations as any other money services business out there. Liberty Reserve operated as an online money transmitter deliberately designed to avoid regulatory scrutiny and tailored its services to illicit actors looking to launder their ill-gotten gains. It is in the best interest of virtual currency providers to comply with these regulations for a number of reasons. These businesses are as much a part of the financial framework as any other type of financial institution. or to another location. Department of Justice. they have the same obligations as other financial institutions. First is the idea of corporate responsibility. and virtual currency administrators and exchangers are financial institutions.Those who are intermediaries in the transfer of virtual currencies from one person to another person. register appropriately. Virtual currencies are a financial service. At the same time.S. child pornography. financial system. Just a few weeks ago FinCEN named Liberty Reserve as a financial institution of primary money laundering concern under Section 311. computer hacking. investment fraud. FinCEN will act to stop abuses of the U. Let me go back to the guidance I discussed earlier. Any financial institution and any financial service could be exploited for money laundering purposes. virtual currency.

From providing services to the unbanked.that privilege -. That’s their obligation and that’s what we expect them to do. With this action we were not painting with a broad brush against an entire industry. But the “potential” and “promise” these advances offer our economy are equally important. And our guidance should help virtual currency administrators and providers become compliant. I do want to address the issue of virtual currency administrators and exchangers maintaining access to the banking system in light of the recent action against Liberty Reserve.S. financial system. Much of what I discussed today focuses on how we are approaching the “perplexities” of virtual currencies. whether a brick and mortar bank or a virtual currency administrator or exchanger. the biggest in U. compliant. well-established businesses that banks will regard as desirable and profitable customers. Banks need to assess their risk tolerance and the risks any particular client might pose. I do not think that is fair to any industry in any situation. We all stand to benefit from such innovation. I would like to close with a challenge to our great innovators: extend your focus to devising creative solutions for preventing the abuse of virtual currencies by criminals. and the related transparency and integrity to our financial system. One of those obligations is a responsibility to put effective AML controls in place so that the type of criminal actors that showed up in the Liberty Reserve case are not able to operate with impunity in the U. keep in mind the combined actions by the Department of Justice and FinCEN took down a $6 billion money laundering operation. That’s what a criminal case is. to the development of new financial products.S. Integrity goes a long way. should be concerned about its reputation. However. ### 4 . to be part of the global financial system. the virtual economy holds great promise. such as those who would exploit children. The innovations we are seeing within the financial services industry are a benefit to commerce on many levels.comes with obligations. I recently heard a banker say that there is a reason that financial institutions have to obtain licenses.S. and those are discussions we need to continue to have going forward. history. I just want to circle back to the themes of today’s event. Again. Every financial institution. and that’s what a regulatory action is – an action against a particular violator. Banks are more likely to associate themselves with registered. It is a great bestowal of trust that enables banks to be part of the U. let alone this one. And this goes back to my earlier points about corporate responsibility and why it is in the best interest of virtual currency administrators and exchangers to comply with their regulatory responsibilities. And that trust -.But keep in mind: this action was taken against one financial institution and one type of financial service. In closing. transparent businesses. reaction from banks. financial system. We can understand the concerns that these actions may create a broad-brush.